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When an “Operating” lease is modified, the new ROU asset balance should be calculated as the amount of change in the liability balance that is added to (or subtracted from) the prior period ROU asset balance immediately preceding the modification. Previously, this was tested on 5/18 for any lease and then still worked appropriately. As of 6/13, this no longer works.

Moving forward, the starting ROU asset value is now calculated correctly when there is an amendment to an “Operating” lease. The changes were made to the following workflows: “triContract – Subflow – Likely Term – Calculate Amend Asset Value” and “triRealEstateContract – Synchronous – triRevise”.

Are you getting ready to address the implications of the new lease accounting changes with TRIRIGA? Although FASB’s ASC 842 and IASB’s IFRS 16 will take effect in 2019, many organizations are only now beginning to realize the amount of effort required to meet the new standards…

The biggest changes to businesses will be the new Right of Use (ROU) Assets and Lease Liabilities that will hit balance sheets, as well as the intensely manual approaches and effort that many see before them. How many organizations are leveraging Integrated Workplace Management Systems (IWMS) to manage their real-estate holdings and automate these manual efforts?…

In order to help organizations comply with the new standards, and understand the implications of these changes, TRIRIGA continues to deliver a single integrated workplace management system with new enhancements in the next release. TRIRIGA supports the lifecycle of facilities management and will automate compliance activities to address changes that affect multiple teams and roles.

Here’s how TRIRIGA can help:

CFO and CAO: The release of IBM TRIRIGA 10.5.3 will provide a sub-ledger system for real estate and asset lease accounting that is able to generate journal entries out-of-the-box for ASC 840 and ASC 842 under US-GAAP as well as for IAS 17 and IFRS 16. It also covers period closings and report generation for the most common reports required under the new standards.

Real Estate and Fixed Asset Managers: The release of IBM TRIRIGA 10.5.3 separates the duties of a lease administrator and a lease accountant, allowing the lease administrator to enter contractual information, and then enabling the lease accountant to run classification tests, reassess lease decisions, and report on the ROU Asset and Lease Liability.

Facility Management, and Occupants: There are also new capabilities to improve day-to-day and occupancy experience. They can leverage a new Workplace Services offering that engages everyday employees through new mobile web apps that provide access to services managed by IBM TRIRIGA, anywhere, and on any device. This includes: a new Service Request app to submit work requests, a new Reservation app to quickly create reservations for individual workspaces or multi-attendee meeting rooms, and a new location-aware Workplace Services Portal to provide a single, unified access point for launching the apps and tracking status of requests…

(1) When capital leases start and end in the middle of a Semi-Annual, Annual, Quarterly, or Monthly payment period, the first and last period amortization in the fiscal line item (FLI) is not prorated correctly. As a result, the Day 1 right of use (ROU) is incorrect.

(2) Massive amounts are appearing in the Capital/Finance Schedule. The Interest Expense, Change in Liability Value, P&L Book Expense, Liability Value, and Net Equity fields are displaying massive amounts, like in the quintillions, even though the total rent is $240K.

We needed to fix the partial payment issue for the current and new lease accounting standards. Moving forward, we fixed an issue that when capital leases start and end in the middle of a Monthly, Quarterly, Semi-Annually, Annually payment period, the first and last period amortization in the FLI is not prorated.

When a “Finance” (or “Capital”) lease is modified, the new ROU asset balance should be calculated in the same way as future accounting “Operating” lease modifications, that is, the amount of change in the liability balance is added to (or subtracted from) the prior-period ROU asset balance immediately preceding the modification.

Note that this calculation should mirror the calculations that were implemented in TRIRIGA 10.5.2 for future “Operating” lease modifications. Currently, we see that the asset balance is set equal to the re-measured liability balance upon a modification.

Moving forward, when a “Finance” (or “Capital”) lease is modified, the new right-of-use (ROU) asset balance is now calculated correctly. The amount of change in the liability balance is added to (or subtracted from) the prior-period right-of-use (ROU) asset balance immediately preceding the modification.

For TRIRIGA 10.5.2/3.5.2 OOB, there is an issue with the “Initial Liability Carryover” (ILC) field. In both operating leases and capital leases, when a value is entered in this field, the right of use (ROU) asset in the future accounting schedules is not reduced at Day 1 (against lease liability (LL) and initial direct costs (IDC)).

The balance in this ILC field should get pulled into the Day 1 ROU asset balance, and it currently does not. If this field is functioning per OOB, then we need to fix it. It is critical that the transition to the new accounting standards is calculated correctly.

The initial carryover balance (ICB) was not applied to new accounting schedules. Moving forward, if leases are created on or after the look-back period, the initial carryover balance will now be applied to operating leases and finance/capital leases.

[Admin: A similar article is also posted in the IBM TRIRIGA blog. This post is related to the 07.27.16 post by ValuD about handling GAAP and IFRS in TRIRIGA leases. To see other related posts, use the ROU tag.]

It has now been well over a year since both the FASB and IFRS have finalized their guidance on the future of lease accounting which is effective beginning in 2019 for publicly traded companies. The tasks to move a company’s leases onto their balance sheet can be overwhelming, considering all the necessary steps to reach this goal. Fortunately, the lease classifications have not drastically changed.

US FASB (ASC) Topic 842

The US FASB (ASC) Topic 842 will continue to allow for lease classification as either “Operating” or “Finance” (previously considered “Capital” leases under Topic 840). However, a fifth criteria was added to the existing four possible criteria that could render a “Finance” classification. In addition, the prior bright lines from Topic 840 no longer exists. The new standard will require more judgement, but also allow more flexibility in the classification decision.

If any one of the five following criteria are met, a lease is considered a “Finance” lease. If none are met, the lease is considered an “Operating” lease:

Ownership of the underlying asset transfers to the lessee by the end of the lease term.

The lease continues a purchase option, which the lessee is reasonably certain to exercise.

The lease term is for a major part of the remaining economic life of the underlying asset.

The present value of the lease payments and any residual value guaranteed by the lessee is greater than or equal to substantially all the fair value of the asset.

The asset is of such a specialized nature that it will not have an alternative use for the lessor at the end of the lease term…

No matter which lease classification is determined, both types of leases will require a right of use (ROU) asset and a corresponding lease liability (LL) to be calculated and presented on the balance sheet…

IFRS 16

One of the major differences between US FASB Topic 842 and IFRS 16 is the classification of all leases under IFRS 16 as “Finance” leases. A lease classification test will not be the determining factor of whether a lease will be presented on the balance sheet. Instead, any lease contained in a contract must be reflected on the balance sheet as a financing arrangement…

[Admin: To see other related posts, use the FASB tag, IFRS tag, or ROU tag.]

The impairment functionality should start as a comparison between the fair market value (FMV) as entered by the user in the Review Assumptions, and the current amortized cost basis of the right of use (ROU) asset for the selected fiscal line item (FLI) period (i.e. ROU asset value in the FLI for the corresponding fiscal period).

Currently, TRIRIGA is comparing the FMV as entered by the user in the Review Assumption, to the FMV as stored/displayed in the Accounting Summary section of the Accounting tab. The impairment should be triggered when the FMV as entered by the user is less than the ending ROU asset in the corresponding fiscal period.

We needed to fix the impairment comparison against the amortized cost (asset value) for the current and new lease accounting standards. Moving forward, the initial impairment calculation no longer compares with the existing fair market value (FMV). Instead, a change was made to compare against the amortized cost.